H. Michael Schwartz
H. Michael Schwartz
Chairman and CEO

CEO Letter

“Self storage is unique. Through active management, we have the ability to increase revenues and manage expenses to an extent that is just not possible in most other real estate asset classes.”

Dear Stockholders:

Since inception, we have been on a strategic mission to transform the self storage industry, one property at a time. 2013 represented the validation of this carefully crafted and rigorously applied strategic plan. Once again, Strategic Storage Trust confirmed its ability to deliver superior performance as revenues, operating margins, net operating income and occupancy all reached new highs.

Our growth has been exceptional, and 2013’s solid operating results continue to make us one of the leading self storage companies in America. Just one year after we began operations in 2008, our sponsor became the number one purchaser of self storage properties in the United States and was ranked among the top 25 self storage operators as reported by Inside Self Storage magazine. In 2010, the SmartStop® Self Storage brand was launched and our sponsor ranked second in acquisitions. In 2011, our sponsor broke into the top 10 of self storage operators at number 8, and in 2012 edged up another position to number 7. All of this in just six years.

Consistently Improving Results

Self storage is unique. Unlike net lease real estate, we are truly an operating company vs. a static real estate portfolio. Through active management, we have the ability to increase revenues and manage expenses to an extent that is just not possible in most other real estate asset classes. We have experienced growth in part due to continued acquisitions, but our true ability to improve performance is demonstrated by our same-store results. SSTI has delivered exceptional same-store performance, resulting in positive revenue growth for 16 consecutive quarters.

From 2012 to 2013, same-store revenues increased 9.1%, same-store net operating income increased an impressive 17.2% and same-store average occupancy increased from 78% to 83%. At the same time, we were able to achieve a 1.5% reduction in same-store operating expenses during this period, due to continued economies of scale and tighter controls. This translated to a decrease in property operating expenses as a percentage of revenues to 39% for 2013, down from 44% for 2012.

The Homeland Portfolio properties exemplify the success of the lease-up portion of our strategy. The portfolio was acquired at the end of 2011 and consists of 12 lease-up self storage facilities (10 in Atlanta, GA and 2 in Jacksonville, FL) encompassing approximately 1 million square feet and 8,000 units. The occupancy of the Homeland Portfolio was approximately 46% at the time of acquisition, providing a lease-up growth opportunity on the way to stabilization. In the past 24 months, this acquisition has proven to be a strong performer. The 46% initial occupancy grew to 81% in 2013. The Homeland Portfolio contributed approximately $1.6 million to our increase in same-store revenue, and experienced a 30% increase in revenue in 2013 compared to 2012. With strong retail locations and ease of access, in areas with strong demographics, this portfolio is representative of the traits we continue to pursue as we grow and expand our presence throughout North America.

% of total rentable square feet, distribution by state and Ontario, Canada

Portfolio Growth

We continue to implement our strategy of building a blended portfolio of primarily stabilized facilities with a tactical allocation of lease-up properties. During 2013, we added 12 additional facilities in the U.S. and Ontario, Canada with an aggregate cost of approximately $81.8 million. These new properties represent approximately 1 million square feet and 7,200 units. We continue to increase our portfolio in targeted key growth markets by expanding our presence in those markets where we have significant penetration or by entering into markets which we have targeted for expansion.

Successful operations of our properties can only happen if we start with the right properties, in the right locations. Customers choose a self storage property based largely on the convenience of the site to their home or business, making high-density, high-traffic population centers ideal locations for a self storage property. Focusing our growth on properties with these characteristics enables us to leverage our operational infrastructure and local marketing reach to improve margins and profits on even well-performing assets. As noted previously, we have also acquired a number of facilities that are either in the lease-up or development stage. We believe we can create long-term stockholder value by developing or redeveloping self storage facilities in those markets that are lacking in new supply of properties and also increasing occupancy at those facilities through the leasing efforts of our management team and the efficiencies created by the SmartStop® brand, website and other marketing efforts.1

Part of the success of our business model is based on the economic reality that smaller operators cannot afford the marketing and technology to operate in today’s highly competitive marketplace. Self storage remains a very large market in an extremely fragmented marketplace with hundreds of mid-sized companies operating 3 to 100 stores and the vast majority of owner-operators (85% of all companies) owning only 1 to 2 facilities. Larger self storage operators, like us, are realizing economies of scale through operational efficiencies such as combined advertising across their properties. We view this as a compelling opportunity to participate in the industry consolidation, and, by carefully and selectively acquiring the right properties, transform our lease-up and development-stage properties into profitable, growing facilities.

Operational Growth

Our continued success is not just a function of strategic acquisitions. It is a direct result of our ability to transform good properties into superior performers. We target attractive properties in strong markets with significant upside potential, and apply strong marketing and business management fundamentals to increase occupancy rates and revenues. We have learned the successful implementation of this strategy requires five critical drivers: high quality properties, operational excellence, an empowered, experienced staff, industry-leading performance-driven marketing, and finally, cutting-edge technology.

We will continue to work with our affiliated external advisor and property manager, along with their talented team of industry veterans and other seasoned professionals, who provide us with the expertise and infrastructure we need for success. Our property management team converts our new properties into institutionally managed facilities under the SmartStop® Self Storage brand name. Through our Revenue Optimization System, utilizing sophisticated proprietary algorithms, we systematically make pricing changes for new customers to maximize revenue and bring more to the bottom line.

Our management expertise also allows us to identify revenue optimization opportunities within the properties themselves, such as reconfiguration of unit sizes and increasing the percentage of climate controlled units. Because many of the internal walls can often be moved, units can be combined or separated, altering sizes to meet the demands of the local customers. We have quickly seen the positive results of these efforts, at times within two weeks of implementation.

In addition, we continue to strategically increase incremental revenues other than through direct rental increases, by offering moving and packing supplies, locks and boxes and offering other services, such as truck rentals and tenant insurance. As a result of this strategy, ancillary operating revenues increased from $2.1 million in 2012 to $2.6 million in 2013, an increase of over 22%.

We are also looking at entirely new revenue sources, including renewable energy. For example, a plan is in place to install solar panels on the rooftops of three of our facilities in the Greater Toronto Area by fall 2014. This is anticipated to drive nearly $500,000 in additional annual revenues for these properties. We are evaluating this on a state-by-state basis to determine if such a program would bring similar value to our U.S. properties.

Going Forward: Continued Growth

We continue to place a significant amount of focus on revenue generation opportunities at our self storage facilities, capitalizing on economies of scale from our growing portfolio. We continually analyze market supply and demand factors, as well as occupancy trends, in setting rental rates, promotional discounts and target marketing initiatives. We will continue to refine our Revenue Optimization System. At the property level, we have put forth a standardized sales approach so that the rental experience is consistent at each of our facilities.

One of the most important elements of our continued success is our performance-driven marketing programs that include world-class branding, advertising, public relations, social media, and a centralized call center. We have developed an integrated marketing strategy for our online, phone and walk-in customers, which includes our new customer-friendly and mobile-friendly website. We have also successfully implemented a variety of website promotions. Our integrated marketing strategy also includes web marketing tools, pay-per-click campaigns (to generate leads and improve brand recognition), and search engine optimization to obtain a dominant position in browser listings, which provide us with a technological edge over competitors.

Our marketing team has made a significant commitment to social media. We realize that today’s self storage customer is increasingly sophisticated in how they prefer to receive their information. Consequently, we are utilizing several different channels of communication and a variety of social media including Facebook, Twitter and Google+. We believe that the implementation of these and other branding and marketing initiatives will enhance brand awareness and drive revenue growth into the future.

Our 2013 results have proven the soundness of our plan, and we believe SSTI has the right strategy, people, and platform in place to continue our growth.

In September of 2013, we closed the program to new investors and we are now entering the next phase of our lifecycle. We expect to continue to see strong growth at the property operations level, as many of our properties are still in an accelerated growth mode and have not yet reached their full potential.

Ultimately, of course, our goal is to provide a profitable exit strategy for our investors. With this in mind, our board of directors has been and is continuing to explore strategic alternatives to create stockholder liquidity. We retained an investment banking firm to help us analyze these strategic alternatives. We continue to assess market conditions and weigh a variety of options. We will act in a manner that is most prudent for the benefit of our investors and will keep you informed of any developments along the way.

Our team has delivered another year of industry-leading results, making SSTI one of the fastest growing self storage companies in the United States.

We thank you for your confidence in SSTI and will continue to work hard to earn your trust daily.

Continued successes,

H. Michael Schwartz
Chairman and CEO

1 Strategic Storage Holdings, LLC, the parent company of our advisor and property manager, employs all of the employees at our facilities and owns the intellectual property rights to our SmartStop® brand.